As many know, Pioneer Natural Resources USA, Inc., (“Pioneer”), recently requested that the Texas Railroad Commission amend the field rules for the Spraberry (Trend Area) Field in Districts 7C and 8 allow for duplicate assignment of acreage when mineral rights were horizontally severed. Statewide Rule 40(d) prohibits the duplicate assignment of acreage. The Spraberry (Trend Area) Field “covers about 4 million acres and includes four geologic formations with a total correlative interval of 3,740 feet.” On August 7, 2013, a hearing on the request was held. The examiners, in a rather shocking twist, not only proposed an Order to the Commissioners that rejected Pioneer’s suggested amendments, but also provided for several other changes that would drastically change the way the Spraberry (Trend Area) Field is developed.
The examiners admitted that “Pioneer’s argument was simple and straightforward: In situations where horizontally severed mineral ownership exists, each mineral owner should be allowed to assign acreage to its own wells in the field to enable full field development.” Pioneer argued, among other points, that the inability to develop horizontally severed acreage under the current Railraod Commission rules could be seen as “confiscation” or a “correlative rights” issue. The examiners expressed sympathy, but noted that if there were any “confiscation”, it was the result of operators’ requests over the years, and common lease terms, rather than Railroad Commission action.
The examiners set out “three parallel historical trajectories that have worked to form the present situation:
1. The normal and routine operation of lease clauses, which are private contracts outside of Commission jurisdiction, have horizontally divided ownership interests in the Spraberry (Trend Area) Field;
2. The evolving development and definition of the Spraberry (Trend Area) Field, at the request of operators, has included field expansion and consolidation to improve recovery of multiple marginal reservoirs and reservoir types within the field; and,
3. Advancements in technology have improved the identification, access and recovery of hydrocarbon resources in the field.
With the history in mind, the examiners proposed that the Commissioners reject Pioneer’s proposed amendment, and instead adopt the following:
• The Spraberry (Trend Area) Field will be deconsolidated into four surviving fields: the Trend Area (Clear Fork) Field, the Spraberry (Trend Area) Field, the Trend Area (Dean) Field, and the Trend Area (Wolfcamp) Field. […]
• The existing field ruled for the Spraberry (Trend Area) Field (as amended on April 12, 2013, Docket No. 7C-0274561) will be adopted for each of the surviving four fields.
• The correlative intervals for these four fields will be correspond to the upper and lower geologic contacts of the Clear Fork, Spraberry, Dean and Wolfcamp Formations, as shown on the log of the Pioneer Natural Res. USA, Inc. - Houpt Lease, Well No. 1 (API No. 42-329-31 029), Section 24, Block 39, T-2-S, T&P RR Co. Survey, Midland County, Texas.
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The area of greatest concern to operators is buried in the examiners’ Conclusions of Law section, where they provide that “[h]orizontally severed mineral ownership within a field creates a point of application for Statewide Rule 37 with regard to minimum lease line spacing requirements relative to the horizontal plane dividing mineral ownership on a tract.” More simply put, adopting the examiners’ proposal would require spacing requirements to be applied vertically (i.e. no drilling less than 467’ above the top, or below the base, of a field).
At an open meeting on November 26, 2013, the Commissioners unanimously rejected the examiners’ Proposal for Order. The sighs of relief from the Permian Basin could likely have been heard from afar. For now, it appears that status quo will be observed by the Railroad Commission regarding operations in this field. We should expect a Final Order to issue soon regarding the requested changes. It will be interesting to see whether any changes adopted will be challenged as time goes on, but the Commissioners ruling has at least temporary stemmed a drastic change (and probable reduction) in our Basin’s drilling activities.